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3 Software Stocks to Buy in a Challenging Industry

·6 min read
In this article:
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The Zacks Computer Software industry is benefiting from the continued digital transformation drive. Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage is expanding in managing infrastructure. Moreover, the industry is benefiting significantly from the ongoing cloud transition

The role of software is evolving. Further, as more and more people work remotely due to the coronavirus outbreak, demand for voice and video communication software as well as productivity software is expected to jump exponentially. This bodes well for industry participants like Adobe (ADBE), SAP SE (SAP) and Verint Systems (VRNT).

Industry Description

The Zacks Computer Software industry comprises companies that provide software applications related to cloud computing, electronic product designing, digital media and marketing, customer relationship management, on-premise as well as cloud-based database management, accounting & tax purposes, human capital management, cybersecurity and application performance monitoring, among others.

Major companies in the industry include Adobe, Cadence Design System (CDNS), Citrix (CTXS), Intuit (INTU), Microsoft (MSFT), Oracle (ORCL), salesforce.com (CRM) and Synopsis (SNPS). Meanwhile, companies like Autodesk (ADSK) and ANSYS (ANSS) develop and market simulation software globally.

3 Trends Shaping the Future of the Software Industry

Higher Spending on Software Aids Prospects: The industry’s prospects are bright, given increased spending by enterprises on software procurement. Continued enterprise investment in big data and analytics along with the ongoing adoption of SaaS opens up significant opportunity for industry players. Notably, cloud offers a flexible and cost-effective platform to develop and test applications and the deployment time is also much shorter compared to legacy systems. SaaS companies are expected to register strong top-line growth on a higher percentage of recurring revenues, subscription gross margin and a lower churn rate.

Cloud Computing Adoption Gaining Traction: The increasing need to secure cloud platforms, amid growing incidents of cyber-attacks and hacking, drives demand for cyber security software. Further, enterprises are focusing on rapid migration to cloud and DevOps technologies to achieve scalability and agility for software development as well as IT operations, which helps in delivering flawless digital experience to clients. This trend has brought immense value to application and infrastructure performance monitoring. It is driving demand for performance management monitoring tools that are not only scalable but also suitable for cloud-based environments.

Remote Working and Learning to Aid Growth: Industry participants are facing coronavirus-induced challenging demand environment, which is expected to hurt prospects in the near term. However, the work-from-home and online-learning wave led to a spike in relevant software demand, primarily enterprise communication, workspace management, human capital management among others.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #165, which places it in the bottom 35% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Notably, a few stocks have the potential to outperform the market based on a strong earnings outlook. Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer Software industry has underperformed the broader Zacks Computer And Technology sector as well as the S&P 500 Index over the past year.

The industry has rallied 36.2% over this period versus the S&P 500’s rise of 46.9% and the broader sector’s increase of 55%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing software companies, we see that the industry is currently trading at 31.69X compared with the S&P 500’s 22.06X. It is also above the sector’s forward-12-month P/E of 27.02X.

Over the last five years, the industry has traded as high as 35.41X, as low as 20.07X and at the median of 26.09X, as the chart below shows.

Forward 12-Month Price-to-Earnings (P/E) Ratio

Bottom Line

3 Software Stocks to Buy Right Now

Adobe: The San Jose, CA-based company is benefiting from strong demand for its creative products. Adobe’s Creative Cloud, Document Cloud and Adobe Experience Cloud products are driving top-line growth. Further, rising subscription revenues and solid momentum across the mobile apps are major positives. Additionally, growth in emerging markets and robust online video creation demand remain tailwinds. Further, improving average revenue per user is contributing well. We are optimistic about Adobe’s market position, compelling product lines, continued innovation as well as solid adoption of Creative Cloud and Adobe marketing cloud.

The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 earnings has moved up 0.8% to $11.88 per share over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: ADBE

SAP: The Walldorf, Germany-based company is benefiting from robust performance of Sapphire Ventures. Moreover, SAP is gaining from strong uptake of S/4HANA and SuccessFactors Employee Central solutions. The momentum witnessed by Ariba and Fieldglass solutions is also noteworthy. SAP's alliances with IBM, Microsoft, Accenture and Verizon favor business prospects. Also, solid demand for e-commerce, digital supply chain and other cloud platform solutions augurs well. The consensus mark for this Zacks Rank #2 company’s fiscal 2021 earnings has moved 6.8% north to $6.25 per share in the past 30 days.

Price and Consensus: SAP

Verint Systems: This Melville, NY-based company is a dominant provider of actionable intelligence solutions. Verint is benefiting from the ongoing digital transformation, cloud migration and automation adoption. The company’s top-line growth is driven by strong demand from security solutions. The consensus mark for this Zacks Rank #2 company’s fiscal 2021 earnings has risen 0.5% to $2.18 per share in the past 30 days.

Price and Consensus: VRNT

Zacks Top 10 Stocks for 2021 

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Verint Systems Inc. (VRNT) : Free Stock Analysis Report

Synopsys, Inc. (SNPS) : Free Stock Analysis Report

SAP SE (SAP) : Free Stock Analysis Report

Oracle Corporation (ORCL) : Free Stock Analysis Report

Microsoft Corporation (MSFT) : Free Stock Analysis Report

Intuit Inc. (INTU) : Free Stock Analysis Report

Citrix Systems, Inc. (CTXS) : Free Stock Analysis Report

salesforce.com, inc. (CRM) : Free Stock Analysis Report

Cadence Design Systems, Inc. (CDNS) : Free Stock Analysis Report

ANSYS, Inc. (ANSS) : Free Stock Analysis Report

Autodesk, Inc. (ADSK) : Free Stock Analysis Report

Adobe Inc. (ADBE) : Free Stock Analysis Report

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Zacks Investment Research